WSNTG Annual Conference 8 th September 2005 WSNTG 9 th Annual Conference “Water Services Strategic Plans – Fact or Fiction”

WSNTG Annual Conference 8 th September 2005 Economics of Water Services Provision – Public Schemes Oliver Ring Director of Services Comhairle Chontae Chiarraí

Water Pricing Policy Principle The governing principle behind the Water Pricing Policy is Article 9 of the Water Framework Directive and particularly the opening sentence: “Member States shall take account of the principle of recovery of the costs of water services, including environmental and resource costs, …... and in accordance in particular with the polluter pays principle.”

Water Pricing Policy Framework In Autumn 1998, the Government adopted a Water Services Pricing Policy Framework requiring: Recovery of ‘average operational’ and ‘marginal capital costs’ of Water Services from all Non-Domestic (ND) users. Metering of all such users by Continuation of policy of not charging the Domestic sector for water services - operational costs to be funded through the Local Government Fund (L.G.F.) and infrastuctural costs to be funded through the DELG Capital Programme.

Circular L16/02 The Policy was communicated to Local Authorities in a series of circulars, which were consolidated in Circular L16/02 of September Capital and Operational cost recovery policies and procedures are set out in the circular. Comprehensive Guidance Notes were prepared by Consultants and rolled out to LAs in 2002, followed by regional workshops.

CCMA Report on Water Pricing The CCMA Water Services Committee established a group in January 2003 arising from concerns expressed in relation to the practical implementation of L16/ 02. The output was a CCMA Report on Water Pricing in January 2004 and the issues raised in this Report are largely still unresolved.

Key concerns of the CCMA Include the capacity of the LGF to fund the cost of Domestic water services the fairness and practicality of the Water Pricing Policy in relation to recovering capital costs from the ND sector

Water Pricing Operational Costs Operational costs have been rising steadily due to increased provision of services, and new and higher environmental and performance standards. A CCMA survey in 2002 found that costs were set to rise by about 282% in all Local Authorities between 1990 and Average Non-Domestic element is about 40% of the total demand.

DEHLG Management Information Questionnaire

2002 Operating Costs (Water & Wastewater) Water’d CCSligo CCKerry CC Ann. Op. Costs Income ND sector {€} Shortfall {€} Shortfalls as % of Ann.Costs 35.7%85.2%51.1%

2006 Operating Costs –Estimated-( Water & Wastewater) Water’d CCSligo CCKerry CC Ann. Op. Costs Income ND sector {€} Shortfall {€} Shortfalls as % of Ann.Costs 49.0%57.2%58.0%

Domestic costs as % of LGF

Operational Costs: Domestic Sector L16/02, Section 1.2. says the Government will continue to fund in a transparent way “the cost of the provision of water and waste water services to domestic users through the capital budget of the Department and, in the case of operations costs, through the Local Government Fund, in a manner consistent with efficiency and environmental sustainability.”

Operational Costs: Domestic Sector Section 12 of L16/02 says “The Water Pricing Framework includes a commitment to fund domestic operational costs through the L.G.F. …The Department is actively involved in developing a process to deliver on this commitment”. LA experience is that there has not been full funding for operational costs since 1998.

Operational Costs: Non- Domestic Sector Section 1.2 of Circular L16/02,, says “Operational costs in respect of the provision of water and waste services to non-domestic users to be recovered in full based on usage, with an attendant adjustment to the commercial rate.” Sections 5 and 6 deal with the detail of Non- Domestic Capital and Operational Cost Recovery.

Issue: Full Cost Recovery (FCR) CCMA view is that the Irish Water Pricing Policy is not a framework for FCR - L16/02 does not explicitly define what it means by FCR. CCMA recommends 7 cost areas which should be included in the FCR, including, cost of replacing existing run-down assets, cost of implementing Environmental Legislation cost of service level improvements.

EU position on FCR “The absence of full-cost recovery either means that subsidies are in place to make up the difference between costs and water charges (so that the water utility can be financially sustainable) or that the asset is being run down.”

Issue: No Profit Section 5.11of L16/02, “The Framework also provides for the recovery of domestic capital cost from the Exchequer and domestic operations costs through the Local Government Fund. It is implicit in this arrangement that Local Authorities do not make a profit from the provision of water services.

Issue: No Profit CCMA considers that the “no profit” concept is in clear conflict with FCR by Local Authorities with the DBO process with LAs adopting a stand-alone commercial approach to the provision of water services “Operating surplus” is part of providing any utility service.

Issue: No Profit CCMA suggests a possible alternative definition: “Water Authorities will not be allowed to raise funds for services other than water services through the Water Pricing Scheme. Where there is an excess of revenue over costs in any operating year, the excess will be applied to fund future water services infrastructure.”

Issue: Cross Subsidisation Section 5.12 of L16/02 says “The clear absence of cross-subsidisation of the domestic users is both a key element of the policy and an issue which has been repeatedly stressed by business groups”.

Issue: Cross Subsidisation CCMA recommends that cross- subsidisation, in either direction, be avoided in the new pricing system. Can only be resolved when a clear policy decision is taken on how domestic water services are to be paid for, and by whom. Until then, any shortfall in income for water services after full cost charging to non- domestic and Local Government Fund contributions will have to be made up by subsidy from L.A. funds.

Issue: UFW (Unaccounted for Water) WP Policy limits the amount of UFW chargeable to the ND Users sector to 20%. National Water Study says about 47% UFW in the Local Authority system The reasons have to do with historic having a low investment, low cost, albeit efficient system. Forcing the Domestic sector to carry costs for UFW levels above 20% is a subsidy to the Non-Domestic sector.

UVF v. Water Conservation. Good water management practice is to manage water conservation on the basis of the Economic Level of Leakage. (ELL) Northern Ireland W.S. which had 37% UFW in 2002, estimates that £600 million is needed to reduce UFW to 20%. After 10 years of substantial investment in England and Wales 75% of Water Conservation have not reached E.L.L.

Issue: UFW CCMA recommends that: Local Authorities be incentivised to become more efficient, with emphasis on serviceability and customer service standards rather than solely on UFW. Realistic and achievable ELL targets should be set for individual schemes for progress over a number of years, rather than immediate 20% UFW cap for N.D. Charging.

CAPITAL COSTS Section 5.1 of L16/02 says “Capital contributions should be sought (from non-domestic users) to cover the full marginal cost of water services capacity reserved by them and that individual contracts from larger industrial users be negotiated.

Issue: Marginal Costs Problems with calculating the ND user sector contribution on the basis of the marginal costs: it amounts to a form of cross- subsidisation which is unfair, and undesirable in terms of the polluter pays principle. it is complex and time consuming to calculate and agree the costings; the calculations are first made at Preliminary Report Stage and revised at least three more times; this frequently leads to frustration and delays in projects.

Issue: Marginal Costs CCMA recommends that average cost pricing be used to determine ND user sector contributions as used in Scotland, Northern Ireland and elsewhere. This would eliminate cross-subsidisation, be transparent and eliminate unnecessary complexity.

Recovery of Non-domestic Capital Costs Two ways in which a Local Authority can recover ND user capital costs. through a volumetric or flat rate water charge as detailed in L16/02, Sections 5 and 6. Through a Development Levy scheme (cf. Section 5.14).

CAPITAL COSTS Section 1.2 of L16/02, includes the following objective: “Collection of capital contributions by Local Authorities from non-domestic users in a structural and uniform manner and in accordance with the polluter pays principle”.

ND Capital Cost Recovery through Water Charges Water charging should be on a volumetric basis for all non domestic users from 2007 onwards, following the proposed completion of universal metering of non domestic users by the end of next year. The issues of FCR, No-profit and Cross- subsidisation have been discussed in the context of Operational costs recovery but the same comments apply

ND Capital Cost Recovery through Development Levies Under the 2000 Planning and Development Act - 3 types of schemes: General Development Contribution Schemes -Reserved Function. Special Development Contribution Schemes where exceptional costs not covered by the general scheme are incurred.- Executive function Supplementary Dev. Contribution Schemes. to facilitate a particular infrastructure service or project. -Executive function.

Issues Considerable variation in the various General Contribution Schemes, as adopted, including the level of charges, methodology of calculating charges, categorisation of developments, etc.

Commercial/industrial Charges Some of the lowest and highest 2004 water and waste water charges

Residential Charges Selected current development charges for water and wastewater for residential units

The wide variation in charges is unlikely to be explained by differences in construction costs or need or infrastructural development. The fact that General Development Schemes are subject to adoptation by Elected Council must be a factor

The CCMA believes that an integrated series of decisions is required to bring the Development Levy Scheme properly into the overall pricing framework for water. These are set out in the CCMA water pricing report and include recommendations to amend the Government WP Policy to include this integration.

Other Issues: New Residential Development The current WP system treats existing residential property and infill within existing networks as domestic and fully fundable by the Exchequer. New residential development outside of the existing network is treated as commercial and capital costs must be recovered, as from the Non-domestic user sector

Other Issues: Incentives for Efficiency Article 9 of the WFD states: “Member States shall ensure by 2010 that water-pricing policies provide adequate incentives for users to use water resources efficiently, and thereby contribute to the environmental objectives of the Directive”.

Incentives for Efficiency Metering and water charges will clearly provide the necessary incentive to the N-D users but it hardly seems adequate to rely on a policy statement in L16/02 {Section 12} that “Local authorities should establish a system whereby domestic users are notified of the true cost of their water services and are encouraged to conserve their use of this resource”.

Incentives for Efficiency At a minimum, measures should include revising the Building Regulations to allow only water efficient design and devices; and providing a meter chamber for all new connections with a view to installing meters (temporary) for water conservation purposes. (The incentive with the best record is still water charging!)

Further Issues Impact of DBOs on operations budgets Expansion of DBO into distribution? Future role(s) of LAs in water services Service provider/ operator Manager of privately delegated operator Local Regulator National Regulator? River Basin Districts & WFD

Finally The key questions to be resolved are: When and how is the Domestic use of water services to be paid for fairly and fully? Is the polluter pays principle to be fully applied in the Water Pricing Policy?

WSNTG Annual Conference 8 th September 2005 WSNTG 9 th Annual Conference “Water Services Strategic Plans – Fact or Fiction”

WSNTG Annual Conference 8 th September 2005 Economics of Water Services Provision – Private Schemes John Casey Associate Director T.J. O’Connor & Associates

Overview of Presentation Background – Group Water Schemes Strategy to address Water Quality Issues Monaghan Pilot Project Implementation of Strategy Economics – Capital Works Economics – Service Phase Conclusions

Background – Group Water Schemes Private Group Water Schemes developed in 1960’s and 70’s Community Initiatives Most economical means of service provision at the time Generally little or no treatment

Water Quality Deficiencies Water Quality deteriorating over time Drinking Water Regulations S.I. No. 81 of 1988 (giving effect to Directive 80/778/EEC) S.I. No. 439 of 2000 (giving effect to Directive 98/83/EC) European Court of Justice Proceedings Initiated August 2000 ECJ finding (Nov. 2002) of failure to implement 80/778/EEC (850 public schemes and in excess of 810 group schemes)

Strategy to address Water Quality Issue Identify and prioritise needs Identify optimum solutions Concept of DBO and Bundling Adapted from French model for rural communities Seen as viable means to ensure: Connect to existing public supply Find alternative source Install treatment plants Ongoing water quality compliance Economy of scale Delivery in short time frame National Rural Water Monitoring Committee set up in 1998 Strategic Rural Water Plans, 1999 onwards NRWMC Action Plan 2003 – 2006

Monaghan Pilot Project Monaghan selected for DBO Bundle Pilot Project Purpose to test market and confirm that strategy workable 10 No. group schemes and 3 No. public schemes T.J. O’Connor & Associates appointed as Client’s Representative DBO tenders submitted in 2001 and Veolia Water appointed as DBO Contractor Most of schemes now completed and in O&M Service Phase Pilot Project confirmed market interest and that DBO strategy is workable Lessons learned for subsequent bundles

Implementation of Strategy - 1 Monaghan Cavan (3 No.) Clare South Leinster (Carlow, Kildare, Kilkenny, Laois, Wexford, Wicklow) Total Value of Treatment Works approx € 60M serving 30,000 Households Galway Limerick Mayo Further bundles are well advanced in: Galway Mayo Roscommon Leitrim A total of 11 No. DBO Bundles (131 No. schemes) have now been progressed to completion/construction or tender evaluation stage:

Implementation of Strategy - 2 Modular Designs Package Plants Maximising off-site fabrication and construction Contractor Innovations Part 8 Planning Post–Tender/Less Prescriptive Employer’s Requirements Rationalisation/Amalgamation of Schemes Evolving Strategy

Economics – Capital Works 1 100% for M&E 85% for civil Max Grant €6476/house Average Scheme DB Cost/House Across 10 No. Bundles : € 3,362/House Typical (10% ile to 90% ile) DB Cost/House range: € 1350/House to € 6400/House Good Value for Money Economies of Scale – 2000 Houses/Bundle Grants available for DBO Capital Cost Typical Range of 15% GWS Contribution € 40/House to € 400/House

Economics – Capital Works 2 MAX. GRANT € 6476/House Total DB Tender Cost v No. of Houses in Scheme For 10 No. DBO Bundles to date (2003 – 2005)

Economics – Service Phase 1 Size of Bundle Size of Schemes Level of Treatment Payments to DBO Contractor Fixed Annual Charge Volumetric Charge Capital Replacement Fund Factors

Economics – Service Phase 2 Average Annual Fixed & Volumetric Cost Cost/House across 10 No. Bundles (based on 219m3/House/Year) Average : € 198/House Typical Range (10% ile to 90%ile) € 153/House to € 249/House Capital Replacement Fund Range Variable, Typical Range € 2/House/Year to € 100/House/Year Affordable and Good Value Current Level of O&M Subsidy €196.81/House

Conclusions (131 No. schemes completed/under construction or about to start construction) Radical Change for Group Schemes Groups and NFGWS meeting challenge Good Value, Affordable Solutions being achieved Acknowledgements : Mr. Louis Kilmartin - National Project Manager Rural Water Jennings O’Donovan & Partners Ryan Hanley Consulting Engineers P.J. Tobin & Co. Ltd. Bundling/DBO Strategy progressing well

WSNTG Annual Conference 8 th September 2005 WSNTG 9 th Annual Conference “Water Services Strategic Plans – Fact or Fiction”

WSNTG Annual Conference 8 th September 2005